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SPY@20: First US ETF Changed Investing

In 20 transformative years, SPY goes from apple in one man’s eye to one of the biggest funds in the world.

[Editor’s Note: This story is the first of a “SPY@20” series of pieces IndexUniverse is rolling out this week and next to commemorate the 20th anniversary of the first U.S.-listed ETF. The package will include a number of interviews with industry sources as well as blogs from IndexUniverse senior executives.]

“SPY,” the very first U.S.-listed exchange-traded fund and the biggest ETF in the world, turns 20 this month, a $125 billion portfolio that’s now in the company of some of the biggest U.S. mutual funds, making it the perfect symbol for an industry that’s on a roll.

SPY was seeded on Jan. 22, 1993, and began trading on Jan. 29—the latter date being the one that most in the ETF industry—including the fund’s sponsor, State Street Global Advisors—plan to mark as the special day that set in motion changes that continue to transform the money management industry to this day.

It’s a milestone that’s almost unbelievable to those who created the fund, officially known as the SPDR S&P 500 ETF (NYSEArca: SPY). The ETF was dreamed up by the late Nate Most as a vehicle for traders that he hoped would help pump up volume at the American Stock Exchange. Most and his entourage thought they’d be lucky if SPY hauled in $1 billion.

SPY did indeed end up appealing to traders, and a whole lot more. The biggest ETF in the world now sits atop a universe of more than 1,400 ETFs that’s increasingly poaching market share from actively managed mutual funds. SPY casts a long shadow, making up about 9 percent of the record $1.403 trillion now invested in ETFs.

“SPY is a product that has really stood the test of time in a lot of ways, because if you think about it, for almost all of the 20 years, it’s been the largest ETF,” said Debbie Fuhr, an independent ETF analyst based in London.

“It’s been the most actively traded most of the time, and most years has also received the largest net new asset flows,” Fuhr added, stressing that the fact the fund has basically delivered—and continues to deliver—on its basic promises is a true testament to its value.

Much has changed since SPY launched in 1993, especially the money management industry itself.

Commission-based stock pickers have been supplanted by fee-based asset managers who view thoughtful asset allocation using low-cost vehicles—increasingly index ETFs—as the best way to deliver solid risk-adjusted returns at the right price—and with more tax efficiencies than actively managed mutual funds.